RUE/FALSE 1. It is important to understand that money like any other commodity is subject to the forces of supply an demand. However, instead of being bought and sold, money is borrowed and lent. The supply curve of money originates from the desire to borrow and the demand curve from the willingness to lend. 2. The interest rate is the price of money 3 The real risk-free rate of interest is determined by the Federal Reserve. 4. Economists believe that people's time preference for consumption is what dictates their level of savings and the supply of loanable funds. 5 The three components of an interest rate are the base rate (the pure rate plus an inflation adjustment), the risk premium, and the premium the consumer must get to defer consumption. Bond price changes brought about by interest rate changes are smaller for bonds of long maturity than fo bonds of short maturity 6. 7. Liquidity risk refers to the chance that an investor will incur a loss because it's hard to sell the bond of a company that isn't well known. 8. Federal government bonds have no risk premium because they carry no risk of any kind 9. The "base" interest rate is made up of the pure rate, an inflation adjustment, and a liquidity risk premium. 10. The liquidity preference theory says that the yield curve should be upward sloping because lenders generally prefer long-term loans. 11. The interest rates that are observed in the economy differ from the nominal risk-free rate due to risk 12. The default risk on US. Government debt instruments increases with the maturity of the instrument 13. Real interest rates have no inflation adjustments. 14. Interest rates generally vary with the term of the debt. The relationship is known as the maturity structure premiums of interest rates. 15. The initial sale of a security is a primary market transaction Subsequent sales between investors are in the